Dilapidations in a Nutshell for Landlords and Investors
Key Questions About Dilapidations
Full Repairing and Insuring Leases are the norm
Full repairing and insuring leases, often known as FRI leases, are, we are reliably advised, the ‘norm' in the UK . This is because you, the business owner, wish to protect your investment and receive it back in as good a position as possible, which can in fact be better than you originally let it out for; because, as already mentioned, the tenant is agreeing within the lease to return the property back to you in the state set out within the lease.
Full repairing and insuring leases enable landlords / property investors to project future income from the rent and future outgoings, i.e. minimal, as the property is full repairing and insuring.
Not surprisingly the full repairing and insuring lease is very popular with institutions and as they are the main investors in commercial properties in the UK , we assume this is why full repairing and insuring has become the norm.
What your lease should have - The famous ‘put and keep' clause
Ideally, if the market allows, the lease should include a ‘put and keep' clause regardless of the condition of the property. This will mean (subject to case law) the tenant will have liability for repairs and also to ‘put and keep' the property in a state of reasonable repair.
To be Avoided at all Costs - Schedule of Conditions
What is Dilapidations?
It is very difficult to define in a few words, basically it occurs when a Landlord and a tenant have taken out a Lease agreement and the Lease has come to an end or the tenant / business owner has decided to leave, and the Landlord requires the building to be left in a suitable condition for him to re-rent, as set out within the terms of the Lease and any Licences that have been issued.
What is the Basis for Dilapidations?
The basis for Dilapidations is the original lease agreement; the terms of this lease are as agreed with yourselves (the landlord / investor) and the tenant / business owner. The terms often agree on the state of the market (economical) and the location of your property together with its desirability at the time you originally rented the property.
A Licence is a formal approval by a Landlord of an alteration or addition that the tenant requires. From the landlord's point of view it should be documented in detail, as many of the tenant's ‘improvements' are very specific to their business and can make the premises difficult to rent in years to come, unless the property is reinstated back to its original condition.
A good example of this is where a company initially takes one warehouse unit which consists of a toilet block, an office and a workspace, and they then expand into the adjoining work space and form a hole between one and the other. This will require a licence, but sooner or later they will decide that they don't need the second set of toilets that the second unit has and wish to remove these to utilise the space. This requires a second licence.
The Lease is Silent on a Matter
Leases are drawn up by human beings (solicitors), therefore items can be missed. This does not automatically make either the landlord or the tenant liable for these repairs and it may simply mean that no one is liable for these repairs, which, ultimately, normally means the landlord is!
Law of Property Act 1925 and the Landlord and Tenant (Covenants) Act 1995
These Acts are the basis for the laws relating to leased property. Whilst we are not legal experts we do take an active interest and would comment:
Privity of Contract, 1 st January 1996
Prior to this date the original tenant is responsible throughout the term of the lease obligation, even if he is no longer the lessee; it is a third party, or even a third party to a third party that defaults.
What is a Licence?
A Schedule of Condition is a schedule of the condition of the property to which the landlord agrees the tenant has to hand it back in, no better and no worse.
If the market conditions, i.e. a recession or worse still a depression, dictate that you have to include a Schedule of Condition to get the property leased and the rent coming in then it is a necessary evil; however, it does then leave any future anomalies to be negotiated on, for example a roof in poor condition on day one, that is recorded as such and each section identified, will still continue to deteriorate over the term of the lease, so when it comes to the end of the lease these are all matters for discussion / negotiation.
Of course, when they come to expand into the third unit the same thing will happen again requiring a third licence for the hole in the wall to connect them to the new unit and a forth licence when they remove the toilet facilities. They will then no doubt have got to the size where they wish to relocate; with the licences the landlord will be able to ask them to reinstate the premises to their original condition, thereby giving you three units that can be rented out plus the benefit of the units now being interlinkable, as whilst the tenants will have blocked the holes back up they will have (ideally) left the lintels still in place.
This is a Schedule of Condition based on the lease and issued part of the way through the lease by the landlord, often when there is disrepair occurring, as a ‘warning shot', so to speak, across the ‘bows' of the tenant and also as a positioning ploy for a future Terminal Dilapidations (one at the end of the lease). This could also be a negotiation tactic for the landlord to be used at the next rent review.
Dilapidations are as Certain as Death and Taxes
When the Lease comes to an end the Dilapidations Notice should be served. The aim, from the landlord's point of view, is to bring the property up to the condition set out in the lease, which should be a condition where the property is more easily rented, or to come to a financial agreement as to the value of the dilapidations and hopefully you will be able to rent out the property in the condition that it is in, which will, of course, depend upon the condition of the market and the locations of the property and the type of property you have to rent, now forgetting, of course, the rent being at a realistic market rate.
Dilapidations – The Moving Target
Another intriguing element of dilapidations is that they are forever evolving as new case law modifies and amends how issues are dealt with.
Dilapidations Lead to Conflict
Dilapidations Defined in a Nutshell
It is very difficult to define in a few words, basically it occurs when a landlord / investor and a tenant / leaseholder have taken out a Lease agreement and the Lease has come to an end or the tenant / leaseholder has decided to leave, and the landlord / investor requires the building to be left in a suitable condition for him to re-rent, as set out within the terms of the Lease and any Licences that have been issued.
Dilapidations always take Leaseholders / Tenants by Surprise
In our experience it is always best to remind the leaseholders / tenants that a Dilapidations will be served. Often the serving of an interim Dilapidations Schedule goes a good way towards this and equally we find ‘policing' of the lease works well, where you have a friendly chat with the leaseholders / tenants.
Scope for argument with regard to dilapidations is almost endless! Dilapidations can lead to conflict in the following areas:
• Arguments with regard to alleged breaches of the Lease.
• Interpretation of the obligations under the Lease.
• Arguments as to whether you (the tenant / leaseholder) failed to meet these obligations.
• Once the obligations have been ‘agreed' then arguments can ensue over the cost of carrying out the various repairs.
Dilapidations and the Chartered Surveyor and Negotiator
Due to the subtleties that have developed in dealing with dilapidations you need a specialist Chartered Surveyor who not only understands dilapidations law and is up to date with the latest case law, he will also need to be a keen negotiator and business person who understands the reality of arguing over a small item with insignificant costs and a large item with substantial costs and obligations.
The Dilapidations Protocol was drawn up by the Property Litigations Association in 2002 and establishes a time table for exchange of information and sets standards for the contents of the claim and sets a standard for the conduct of the negotiations and follows the following procedure:
• The landlord serves a Schedule of Dilapidations outlining the breaches of repair obligations, which is served within a reasonable time.
• The landlord's claim is qualified and quantified in a separate document.
• The tenant's response is also qualified and quantified and submitted to the landlord, again within reasonable time, using the Schedule provided by the landlord, often known as the Scott's Schedule.
• The next step is for the negotiations to take place, preferably at the place where the dispute is. Meetings are without prejudice.
Whilst this protocol is not compulsory if the dilapidations leads to court action and the protocol has not been followed by the landlord, tenant or their legal advisers then the courts will usually be in favour of those trying to follow the protocol.
This is a standard format utilised to allow the negotiations to proceed in a logical process. The Scott's Schedule takes the following form:
The remedial work required – this should not be too specific, and certainly not prescriptive i.e. it should be ‘repair roof' rather than ‘repair roof with an elastomeric felt.
We would also recommend that the surveyor, whilst in negotiations, also manages the client's expectations, ensuring these are realistic.
Many Chartered Building Surveyors specialise in Dilapidations work and are the most common type of Chartered Surveyor found carrying out this discipline; in fact some practices specialise in this area.
What sort of fees should I expect?
The RICS guidance with regard to fees is that they should not be based upon a commission basis, i.e. based upon the savings obtained by the Chartered Surveyor working for the tenant or the size of the claim if working for the Landlord. Fees should be based either on an hourly rate, a day rate, or a fixed charge. Very few surveyors will work for a fixed cost due to it being very difficult to establish how much time will be taken in dealing with such a claim.
Please telephone us on 0800 298 54 24 for an hourly or daily rate.
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